Thursday, 3 December 2015

Dollar General: small box discount retailer earnings thoughts

It has been over a year since I last looked at the 'small box discount retailer' Dollar General...

...when I concluded that I was going to take some profits after a good trade (link here). I was rather surprised by the strength of the Dollar General shares in early 2015 but what is interesting is that after a big fall in recent months the shares are now around the level I sold them for:

So what to think now?  Well in the Q3 numbers disclosed today the company noted same-store sales rising 2.5% in Q3 as both traffic and average transaction basket increased.  The 9 month equivalent same store sales growth numbers rose 2.9%.  Operating profitability edged up around 5% year-on-year over both periods.  In terms of outlook akin trends were seen although note the comment that Christmas will see a 'shop closer to events'.  

'The Company's revised outlook for the 2015 fiscal year anticipates net sales to increase by approximately eight percent over the 2014 fiscal year, with same-store sales expected to increase 2.5 to 2.8 percent. It is still very early in the Company's fiscal quarter with a core customer that tends to shop closer to events'

The actual full year guidance was tweaked down slightly on an income tax related issue (which can be looked through). Elsewhere the plan to open over 700 new stores in 2015 followed by 900 in 2016 remains.  

In terms of comments on the conference call the company noted: 

‘returning cash to shareholders remains a priority’ - $1.6bn expected

‘our core consumer is still struggling…no real income growth’

‘phase 1 stores on track to achieve our sales expectations’

‘shrink improvement one of our great opportunities’

‘clear vision on where we want to buy and how we want to get there’

‘we see a real opportunity to save our consumers time and money each day’

I like the return to shareholders (7%+ of market cap) and note the continued store roll-out and what seems to currently be a continued solid same store sales profile.  Chat about the potential of re-modeled stores (open them up, increase cooler doors etc.) offers some further hope re the 2016 guidance but - of course - first we need to get through Christmas first.  

The company is not overleveraged (x1 net debt to ebitda) and cannibalisation has not yet kicked in at first glance.  The consumer backdrop is not easy but at x11 EV/ebit the share is not horribly expensive - as I noted back in mid 2014 the mid US$50s is rude for this share.  Below US$60 I would be comfortable buying this name.  At c. US$65 (with a positive reaction to the numbers today) I may just await a couple of bad days for the share/the general market.

However is this a share that inherently I like?  The answer is 'yes'.

A final trading thought - in the US discount-y retail space maybe you buy the share out of Dollar General and Wal-Mart (last write-up here) with the lower share price.  Currently that would be Wal-Mart...

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